Mom Knows Money: Three tips for teaching kids about borrowing money

After years of tightening the purse strings, Americans are feeling a bit more confident about their financial situation.

A recent reportfrom the Federal Reserve Bank of New York says Americans are borrowing more money to purchase big ticket items such as homes and cars.

Among the findings, borrowing money for cars increased by $20 billion in the second quarter of the year from the previous quarter and Americans added $8 billion to credit card balances.

While these numbers offer a sense of economic encouragement, it is important to understand what it means to borrow money and potentially take on debt.

If we explain to our children what it means to borrow responsibly today, they will be better prepared in the future when it comes time to make those substantial purchases.

Here are three tips for teaching kids about borrowing money.

1. What do you mean I have to give it back? I’m just as guilty as I’m sure many parents are of giving our kids money without the responsibility of having to repay it. In fact, over the summer, my husband and I gave our 6-year-old a couple dollars every so often for him to get used to making transactions and getting change. Yes, he was adorable walking up to the counter and pulling out some crumpled dollar bills. However, as they get older, I think we should challenge them a bit and make it clear that if they want money for certain things, and haven’t earned it, they can borrow it with the intention of repaying it. Unless they earn it, it is ultimately not theirs to spend.

2. Borrowing can be interest-ing and frightening. I’m sure we’ve all been in situations in which we borrowed money from a friend or family member and were expected to return the amount borrowed. We need to teach our kids that borrowing is typically not that easy and not free of charge. I’m talking about the interest which banks and credit card companies will charge consumers for borrowing money. Too often kids will take on that first credit card without understanding that they are being charged money to borrow. If kids and even adults don’t know any better, they can easily borrow more than they can afford and find themselves in a horrible situation trying to pay it back. Bottom line – they’ll owe more than they originally borrowed.

3. A financial report card. Well, kids, the report cards don’t stop once you are done with school. Once you start borrowing money or taking on debt, you will receive a credit score letting lenders know how responsible you are in paying back the money you borrow. If you give it back on time, others will be more likely to lend you money. If you develop this behavior at a young age, it will be so much easier to get the money you need to borrow once you are ready to buy that first car or home.